TRICKS WITH NO TREATS!

Tricks that mortgage brokers can pull and how to deal with them.

A core problem in mortgage shopping is that the loan provider knows far more than the borrower. So mortgage shoppers need to know how to protect themselves. Here are some of the tricks of the trade, followed by your protection. 

Par rate

With regard to mortgage, the par rate is the interest rate a borrower qualifies for with a given bank or lender with no add-ons or adjustments to fee. In other words, the borrower would receive the par interest rate if there was no yield spread premium charged by the broker or lender, and no adjustments to rate or fee.

Par rate, otherwise known as the base rate is determined by the borrower’s particular loan scenario, which includes adjustments for things such as loan amount, credit score, property type, loan-to-value, and so on. The par rate for a high-risk borrower will be much higher than that of a low-risk borrower because of adjustments, but a broker or lender can still manipulate a low-risk borrower’s rate by taking an excessive yield spread premium.

Let’s look at an example:
6.5% -1.00
6.25% -.50
6% 0.00
5.75% .50

In the example above, we see interest rates with corresponding fees or rebates. 6% is the par rate assuming there are no adjustments because it falls on zero. However, you may have an adjustment for loan amount of say .25%, and an additional credit score adjustment of .25%, so your total adjustments to fee would be .50%. You would need to factor in those adjustments to figure out your actual, or adjusted par rate, so in the preceding example, total adjustments of .50% would make the par rate 6.25%. The par rate is the difference of the adjustments to fee of .50% and the price of -.50, which equals zero, or par.

In many situations borrowers may not realize that their particular loan scenario carries few adjustments, and will ultimately allow them to qualify at a low par rate. Watch out for corrupt brokers who tell you that your deal is trickier than it seems. Make sure you review the mortgage adjustments section of this site to see what lenders hit borrowers for, and always ask a bank or broker what your adjustments to fee are, and how much yield-spread premium they are charging.


A RATE SHEET
http://www.novellemtg.com/files/PayOptionArm.pdf

Mortgage Pricing Adjustments

If you ever get your hands on a rate sheet, you’ll notice three main sections along with some basic guidelines. Although each bank or lender will have their own format, if you know these basics, you can read most any rate sheet and give yourself an edge during the pricing game. Usually on the left-hand margin or the top of each rate sheet you’ll see loan programs and rate boxes corresponding to each program. Each program should be titled with a loan program and description such as 30 yr fixed, program #sample123. Below that title will be a list of rates and corresponding rebates. In the example below, you’ll see the rate, points, APR, and the estimated payment per $1,000.

The par rate, or zero points, disclosed. Meaning if you have no pricing hits or incentives, and the bank or broker isn’t charging/making any points, you would get par rate.

However, it’s not that simple. On the rate sheet you’ll also notice a section titled, “Adjustments to fee”. In this section, you’ll likely see LTV (Loan-to-value) percentage tiers, the most common being: less than or equal to 65% 65.01-70% 70.01-75% 75.01-80% Under each of these tiers will be a variety of adjustment descriptions. If you look these over, you’ll see where banks and lenders are hitting you or helping you when analyzing your loan scenario. All of these adjustments to fee work as pricing hits or incentives based on your LTV and your personal loan scenario. With a pricing hit being a positive hit, and a pricing incentive a negative hit. The more negative hits the better, as a negative works as money-back to the bank, lender, or borrower.

Pricing adjustments and guidelines vary greatly from bank to bank, but there will almost always be pricing adjustments for loan amount, credit score, property type, occupancy, transaction type, impounds, and interest-only.

Yield spread premium

Yield spread premium, or YSP is the fee paid by the lender to the broker in exchange for a higher interest rate, or an above wholesale rate. Though the borrower may qualify for a certain rate, the broker can charge this fee and give the borrower a slightly higher rate to make more commission. This practice was originally intended as a way to avoid charging the borrower any out-of-pocket fees. However, many feel the intentions have been misguided, and have ended up as just another fee the borrower gets stuck with.

Be careful to review your HUD-1 or Good Faith Estimate to see what this fee is, and why it’s being charged. You shouldn’t be charged both a YSP and an origination fee. This would mean the broker is charging you twice. Please also note that the verbiage can vary, and may read as “par-plus pricing”, “rate participation fee”, “service release fee” and so on. Make sure you go over each fee to ensure you don’t get duped! Brokers will also charge a YSP as a way of providing a “No Closing Cost” loan.

Basically the broker will charge a YSP large enough to offset any upfront fees the borrower would have to pay, and still end up with enough to make a decent commission. An example would be a broker that charges no points, but charges a YSP of 2% on a $400,000 loan. The total compensation to the broker is $8,000, and the fees associated with the loan may be $3,500. The borrower won’t have to pay the $3,500 as it will be subtracted from the broker’s YSP of $8,000, still leaving the broker with $4,500 commission. It sounds alright, but the rate the borrower receives will be substantially higher than it would be at par. There is a lot of controversy surrounding this practice, and an ongoing fight between mortgage brokers and institutional lenders. Brokers must disclose the YSP, whereas institutional lenders can avoid disclosing it as their yield spread may not be determined until a later date when the loan is sold on the secondary market.

Many of the tricks mentioned, or very similar tricks, can be played by lenders and brokers alike. 

1)  Low-ball Offers: To draw customers, some brokers and lenders will advertise low-ball prices that they have no intention of honoring. Once they get you in the door, they will play bait and switch, or letem dangle. "Bait and switch" is the game played by some appliance merchants and others who advertise a low-ball price but when you arrive at the store they happen to be out of the advertised special and try to interest you in something else. "Letem dangle" means keeping you on the hook in the hope that market rates might drop enough to make the advertised special profitable. Lenders play these games as well as brokers.

Protection: Don't respond to any ad that quotes a price 1/2 point or more below the lowest price offered by anyone else. Is This Deal Too Good to be True?

2) Bait and Switch: Some mortgage brokers and lenders will fail to mention certain fees until the borrower is in too deep to bail out, then remember them. They will drag out the process to make it hard for you to "start over with another broker or lender."

Protection: Require the broker or lender to provide a written Good Faith Estimate within 3 days of contacting them. Do not pay for an appraisal before offered a list of all fees to be paid by you. By law the lender has 3 days to give you that information after you have made loan application. Use your two week window in which your credit can be pulled multiple times with no additional hits to your credit score. Apply to at least two or three lenders and shop for the best deal. My advice don't trust any broker to do this for you. 

3)Play the Market: Usually there is a lag between the time a borrower submits an application and the time when the loan terms are locked. The loan provider will always explain to the borrower that the terms quoted at time of application are subject to change with the market. If market rates subsequently rise, the borrower will indeed see the rate on his loan rise. If market rates decline, on the other hand, some loan providers will leave the rate on the loan unchanged unless the borrower challenges it. Randy Johnson, in his excellent book, "How to Save Thousands of Dollars on Your Home Mortgage" (John Wiley & Sons, 1998) claims that this game is common, played by lenders and brokers alike.

Protection: You must monitor the market during the period prior to locking the loan, and let the loan provider know you are doing so. Charge the Lock Price But Don't Lock: Some mortgage brokers will charge borrowers to lock the rate and points, but not inform the lender. If interest rates don't rise, the broker pockets the lock premium, and if they do rise the broker moves to Mexico.  This is much less of a hazard dealing with a lender. Insist on seeing the loan commitment letter from the lender who has allegedly locked your loan. You should not deal with a mortgage broker who won't agree to show you the commitment letter. 

4) Rig the Market Rate Against Floaters: Borrowers prepared to take the risk may elect to "float" the rate and points during the period until the loan closes, betting that market rates will not rise. The "market rate", however, is what the loan provider says it is, and some of them up the price as the closing date approaches. Lenders do this as well as brokers.

Protection: If you float past the point where you can bail out and shop elsewhere, your negotiating power is weak -- unless you had the foresight to protect yourself in advance when your negotiating power was strong. You should get the loan provider to agree in advance that the price offered you when you lock near closing will be the same as the shortest lock-period price being quoted to potential new customers on the same day.

5) No-cost Loans That Aren't: Loans with high rates for which lenders will pay points are sometimes advertised as "no-cost" loans, which they are not. They are zero point loans, but there may be substantial fees of other types. False advertising is not limited to brokers.

Protection: Check the APR. On a true no-cost loan, it should be the same as the interest rate. If the APR is significantly higher, it is because there are substantial fees. Also check the Broker YSP or other commissions paid by the lender to the broker. You may be charged a higher interest rate or he will put terms such as a prepayment penalty in your loan to earn the YSP. 

6) Interim Refinance: Borrowers who want to refinance a mortgage that has a sizeable prepayment penalty may fall prey to the interim refinance ploy. The first refinance is for an increased loan amount that includes the penalty but carries a high rate, while the second, occurring several months later, lowers the rate. The borrower does avoid having to pay the penalty in cash, but the cost of the two deals wipes out most or all of the gains from refinancing.

Protection: Just don't do it. 

7) Contract Chicanery: Borrowers who accept whatever they are told may fall prey to contract chicanery: incorporating a provision in the loan note favorable to the lender, without mentioning it to the borrower. Lenders will usually pay an extra point or so for a prepayment penalty, so the broker who includes it in the contract without your knowledge can put the point in his pocket -- rather than in yours, where it belongs. Loan officers working for lenders might do this as well.

Protection: Read all documents carefully at every stage of the process; if there is a prepayment penalty, it is shown on the Truth in Lending disclosure statement.

If I were to shop mortgage brokers tomorrow, I would ask the following questions of any broker interested in my business.

QUESTIONS TO ASK THE MORTGAGE BROKER

1. When I lock the rate/points, will you provide me with a copy of the loan commitment letter as soon as it has been received from the lender?
2. If I elect to float the rate/points, on the day the terms are locked will you give me the rate/points that are consistent with those being quoted to potential new customers on that day?
3. Before accepting any money, but after the loan features have been established, will you provide me with the following information in writing?

Type of Loan: _______________________________( get a clear explanation- in brokers own handwriting) 

Term:___________( make sure you understand the entire term and interest adjustments)

Years Term of Loan:______( Be careful many lenders are now selling 40 year loans)

Loan Amount: $___________( make sure if you are refinancing for cash out that you will receive it) 

Interest Rate: _______% Fixed ________% Variable_______Locked until______

Variable Interest Rates_________________( Get a clear explanation based on what index or margin or both. When and how it will be adjusted.)

Rate will adjust_________Monthly_______Yearly_________Other

Interest will compound __________Daily_________Weekly_________Monthly 

Lender who has approved your loan:______________________________________________________

Lender's conditional approval based on these documents Requested:___________________________

I will earn a YSP from the lender based on:________________________________________________

I will not take a YSP from the lender and you will pay me an origination fee of _________________

I certify under penalty of perjury that this is an accurate representation of the loan I'm offering to broker for you. I will be held liable for any material ommissions or misrpresentations contained herein. I ceritfy this is a loan I have already recieved conditional approval for pending the collection of any additional paperwork requested by the lender.

Broker Signature:______________________________________________Date:__________